Once-Hot Property Market Cools Off With Economy
In only a matter of months, the softening economy has turned many once-promising Los Angeles-area commercial real estate deals and developments into duds.
Property sales have been called off. Many new buildings have been slow to lease and rents in some areas have settled down from last year’s lofty levels. Investors and developers have scrapped ambitious building plans formulated only months ago.
Though large investors and developers can survive until better times return, many small and underfunded players will certainly fall by the wayside, real estate observers say.
The growing list of postponed projects and deals proves the difficulty that even the most savvy and sophisticated investors have in predicting the ups and downs of the property market.
“That’s the breaks and the risks of developing real estate,” broker Jim Biondi said.
Many projects--particularly those involving residential and industrial properties--that are well underway and have secured financing and tenants have managed to avoid being dragged down by the slowing economy. And projects that won’t open until next year are expected to miss the slowdown in the coming months.
For example, Maguire Partners recently began to prepare for construction of a 265,000-square-foot office building at the Playa Vista development near Marina del Rey. Despite the lack of signed leases, company officials say they expect demand will have strengthened in time for the building’s completion in July 2002.
“If we were opening it today, [conditions] wouldn’t be as favorable as they will be a year from now,” said Maguire Partners executive Timothy J. Walker. “I think a lot of the [economic damage] will be healed by that time.”
But many speculative ventures--particularly office buildings--in the early planning stages or without tenants are now in doubt in the face of lowered expectations. Many tenants, investors and lenders have pulled out of the market because of economic uncertainty.
“Our company will be looking at a lot of acquisitions, but we will be very selective and conservative,” said Wayne Brandt, who heads the Los Angeles office of real estate investment firm Menlo Equities. “In the short term, there is not going to be a lot activity.”
Shamrock Capital Advisors and Regent Properties, for example, took the West Hills Corporate Village, a huge west San Fernando Valley office complex, off the sales block earlier this year after offers failed to meet expectations. Instead, Shamrock Capital last week bought out Regent’s share of the property and will hold it for the long term, said George Buchler, president of Shamrock’s real estate fund.
“If we had gotten a truly premium price for it, we would have sold,” Buchler said.
In Orange County, developer Lennar Partners pulled the plug earlier this year on a 20-acre office park planned near John Wayne Airport. The company, which is going ahead with major projects in the San Fernando Valley and other locations, said it dropped the Orange County development after it became clear that projected rents next year would fall at least 10% below early estimates.
“It no longer made the project economically feasible,” said R. Lang Cottrell, Lennar’s vice president of commercial development. “It would have been a significant investment.”
In downtown Los Angeles, the rush to convert many older, obsolete commercial buildings into high-rent, telecommunication switching stations has dropped off dramatically as the high-tech industry copes with the sluggish economy. Brokers say demand for such space has dropped by about two-thirds in recent months.
“There have been a lot of people that have missed the boat,” said CB Richard Ellis broker Whitley Collins. “Everybody felt that the demand [for telecom space] was going to be unlimited.”
On the northern edge of downtown, the soon-to-open Infomart Los Angeles has leased about 60% of its space to telecommunications tenants.
But brokers say the project, housed in the former Terminal Annex postal facility, will be hard pressed in the near future to fill up the remaining space with the desired high-tech tenants.
“Everybody is seeing an impact,” said Tom Jones of Dallas-based Infomart. “The tenants that we see are continuing to look at their alternatives. They are not as aggressive as they once were.”
South of downtown Los Angeles, a former distribution center purchased last fall amid the telecommunication conversion craze so far has failed to sign a major tenant, according to people involved with the 350,000-square-foot warehouse property. Officials from New York-based building owner Argent Ventures were not available for comment.
In the South Bay, Denver-based Prologis Trust is on the verge of completing 1 million square feet of industrial and office space without a single tenant.
Though such a facility usually takes about 18 months to fill up after completion, Prologis Park Torrance would have been substantially pre-leased if it had opened in the super-heated market of 2000, local brokers say.
“A year ago the demand was exceptional, extraordinary,” said Larry Harmsen, who heads Prologis’ Southern California operations. “Demand has slowed a bit, but we don’t have an overbuilt situation. We feel good about that in the long term.”
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Bad Timing
The softening economy has dimmed or dashed the prospects of many commercial real estate projects and deals that looked like sure-fire hits only a few months ago.
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Project: 20-acre office park by Lennar Partners
Location: John Wayne Airport area in Irvine
Impact: Lennar pulled the plug as rents fell below projections.
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Project: West Hills Corporate Village
Location: West Hills
Impact: Property owners Regent Properties and Shamrock Capital Advisors take office campus off the market after failing to attract suitable bids.
Project: Infomart Los Angeles
Location: Downtown Los Angeles
Impact: Renovation project will open this summer nearly 60% pre-leased, but demand for telecom and high-tech space in general has dropped dramatically.
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Project: Prologis Park Torrance
Location: Torrance
Impact: 1-million-square-foot industrial park nears completion without pre-leasing.
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Source: Times research
